M&A and Stock Market Turmoil: What You Need to Know
M&A and Stock Market Turmoil: What You Need to Know
(Bloomberg Gadfly) -- We knew this day was coming, and yet no one really knows why it's suddenly here: Stocks took a tumble, if only because it feels like they were collectively due for a re-pricing. Traders say they aren't panicking, but their computers sure are. So what does it mean?
For the mergers-and-acquisitions market that I cover at least, a rout will be a double-edged sword and a test of how flimsy each deal's financial assumptions are. In the sense that it weeds out the less-sound transactions, it could be a good thing. I've been warning that some takeover valuations we've seen in the last year looked strikingly high, a function of certain industries' desperation for growth and overzealous dealmaking cheered on by investors.
M&A was already off to its strongest start this year since 2000, and to the extent that we begin to see valuations lose their bloat, more buyers could be compelled to buy and sellers sell. But it's a careful balance, because as stocks fall so, too, does CEO confidence, perhaps the biggest determinant of dealmaking. And without a healthy deals environment, President Trump's pro-business pitch has another hole.
Still, there are those transactions that will be largely unmoved by these market events, such as the media deals stealing most of the attention this year: Walt Disney Co.'s $52 billion all-stock offer in December to buy most of 21st Century Fox Inc. and the potential merger between CBS Corp. and Viacom Inc. that's currently back under discussion. Cord-cutting, the success of Netflix Inc. and the growth in new streaming services means that scale is of the utmost importance in the entertainment-media space, especially after the distributors underwent their own wave of consolidation.
In the case of CBS-Viacom, de facto controlling stakeholder Shari Redstone is more preoccupied with long-term strategic solutions and legacy planning than with what the companies' stock prices are doing day to day. Viacom has been in a rut for years. As for Disney, I do wonder whether a pullback diminishes the likelihood of Comcast Corp. making a counteroffer for Fox, which CNBC reported Monday was a new possibility. Comcast dipped 4.7 percent on Monday, outpacing the losses for its peer group.
Likewise, targets for which merger-arbitrage traders were anticipating bidding wars -- Dr. Pepper Snapple Group Inc. may be one example -- are less likely to draw them if it's harder to justify a bump in price now. My colleague Chris Hughes also explained earlier Tuesday how equity financing could become more expensive as investors seek bigger discounts for new offerings.
One deal to keep an eye on is CVS Health Corp.'s $77 billion acquisition of Aetna Inc., last year's largest transaction. CVS bought at the top and is taking on a lot of debt to do so. On top of that, as Max Nisen wrote last week, the long-feared health-care threat from Amazon.com Inc. has arrived as the technology giant teams up with Warren Buffett and JPMorgan Chase & Co. to tackle employee health costs.
It's too soon to know exactly how this will all shake out, but stock-market weakness combined with rising borrowing rates will bring some sanity back to the M&A market by making it more difficult to explain away big, dumb deals.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.
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